Prediction Update: How are my 2024 Contrarian CRE Calls Doing?
Nailed it on rates, directionally accurate on return-to-office
Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future. - Warren Buffet
I often say that my job is to predict the future, which is one of my favorite parts of what I do.
(I wonder what that says about me … )
So true to form, last December I made three contrarian predictions about the 2024 real estate investing landscape.
Let’s see how I did:
1) THE CONSENSUS IS WRONG ON RATES
GRADE: A+
I mean, nailed it. I wrote at the time:
“The entirety of the real estate complex is sure of a single fact: interest rates are headed lower in 2024.
But what if they’re not.”
I identified two flies in the proverbial ointment, geopolitical risk stoking inflation fears and a US economy that outperformed expectations. Both have proven to be true, and even though the Federal Reserve lowered rates 50bps in September, rates are back up to the highest level of the year.
Remarkably, the forward SOFR curve that I showed in December predicted rates bottoming out around mid-2025.
Now less than a year later, even though markets seem to be worries inflation may not be licked, the SOFR curve is still predicting 125bps in rate cuts by January 2026.
Commercial estate owners and buyers have supremely disappointed about their rate hopes being dashed, and the good vibes of the September rate cut have completely fizzled out.
2) OFFICE DEMAND COMES ROARING BACK
GRADE: B
A few months ago, this prediction wasn’t looking good. But time has been my friend here.
In September 2024, Amazon CEO Andy Jassy made waves by announcing a mandatory return to office five days per week by January 2025.
Additionally, according to a recent KPMG survey, 83% of CEOs now believe a full return to office will happen in the next few years (up from 64% from 2023).
In my native San Francisco, office vacancy continues to hit records but office demand metrics are flashing green for the first time in years, in part driven by AI firms taking blocks of space.
My primary thesis on a rebound in office demand was the return to a more normalized work life, with remote and even hybrid work becoming less prevalent. That hasn’t quite played out, but there does seem to be a growing consensus that companies want butts back in seats.
So perhaps “roaring back” was a bit overly optimistic, but I’ll give myself points for being directionally accurate.
3) UNIVERSITIES FIRE SALE ASSETS TO RAISE FUNDS
GRADE: B
With some creative license, this one’s been an OK prediction.
I wrote these predictions at the end of December, a few weeks after the now infamous Congressional testimonies from the Presidents of Harvard, MIT and U Penn.
I certainly did not foresee the violence on campuses around the country in response to those hearings and in subsequent months related to geopolitical protests.
But in many ways these protest incidents should be seen as the symptom, not the disease: Higher education has been ill for a long time and it is only now spilling over.
My premise was that mundane things like enrollment decline, mounting student debt and a rapidly evolving landscape for intellectual jobs, not to mention recent cultural skirmishes, could turn donors away, and that colleges would turn to selling off physical bits of themselves to stay alive.
I continue to expect this trend to play out in the coming years.